By Michael Lim M.H.
Philippines Inquirer
First Posted 00:59am (Mla time) 11/18/2007

Fueled by low interest rates and excess liquidity, the housing boom in the United States lasted for more than a decade during which mortgage firms extended loans to borrowers with poor credit record. Brokers, who were given fat commissions, enticed these borrowers into availing themselves of housing loans with minimal down payment and lax documentation and credit checks.

The loans, known as subprime mortgages, typically charge two to three percentage points more than those with less-risky credit profiles and carry adjustable interest rates that can cause payments to jump in later years.

While the going was good, homeowners saw housing prices escalate, prompting them to take out home equity loans that helped fuel consumer spending.

Banks and other financial institutions repackaged the debts with other less risky debts and sold them to investors worldwide. These financial instruments are called collateralized debt obligations (CDOs).

When the borrowers defaulted on their subprime mortgages, things began to unravel. Holders of the CDOs headed for the exits, pushing the prices of their assets down. As a result, thousands of US homes have been foreclosed and financial firms in the United States and others parts of the globe suffered huge losses. (See list.)

The crisis is not easing up soon and may lead to a slowdown in the United States, the world’s biggest economy.

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